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Opportunity turned to crisis
La Nacion
January 09, 2010

Claudio Loser
for LA NACION

It's become an international catch phrase, the notion that Argentina is perhaps the only country that has the capacity to turn an opportunity into a crisis.

The institutional crisis generated by the attempt by the government to create a fund to guarantee the foreign debt and the subsequent attempt by the Executive Branch to remove the president of the Central Bank are a sign of the aforementioned aphorism. Independent of the judicial and political resolution of this regrettable incident, it has already inflicted a greater damage on the country's tenuous international prestige.

Argentina's reputation as an untrustworthy international counterpart has already been for some time, even before the default of 2001. At that time it was seen as a justifiably action on the part of the Argentine government. However, on measure that Argentina was exiting its worst economic crisis in 50 years, it was hoped there would be a negotiated solution with the creditors. The authorities didn't follow this more institutional path, and pushed a unilateral solution, which left out a very high number of bondholders and practically all of the Paris Club.

The perception of bad faith was aggravated by the unmeasured placement of reserves by Argentina at the Bank of International Settlements to take advantage of the judicial immunity of that institution. While this position was coherent with the position of Argentina not paying, this was an abuse of that institution for national ends. The country has 80% of its reserves at the BIS, a percentage far above any other country with deposits at the institution. But still, 10% of the assets of the BIS are with Argentina. Again this action negatively impacted the perception of international investors around the seriousness of the country in complying with its obligations.

Soon after the de facto confiscation of the pension funds, the Central Bank's international reserves, while inaccessible to creditors, became the government's new prey. The apparent intention is to guarantee debt payment, but the reality is different. With reserves far above US$40 billion, the real goal is being able to divert resources to other areas of the budget, certainly more in line with an opportunistic expansion of fiscal spending. The president of the Central Bank certainly understood this dangerous waste of resources, and became terminally opposed to the government's action, as he as well as the judiciary considered it illegal.

Still when the president Redrado could prevail in his position in the arena of the Judicial Branch, the damage to the already spent international Argentine image is almost irreparable. Under current conditions, still when some creditors can see the possibility of collecting on their bonds, the effect on the international financial market is negative. Very few investors will be ready to make an exchange of debt and less still to lend fresh money to Argentina. In the final instance, the recent actions of the government, instead of improving access to the markets, ended up destroying any immediate possibility of obtaining foreign financing and the investment funds that Argentine needs to grow in a sustainable way.

The author was the director of the Western Hemisphere Department of the IMF (1994-2002).

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